Jakarta, CNBC Indonesia – The Central Bank of England (Bank of England / BoE) and the United States Central Bank (Federal Reserve / The Fed) are compact to raise their benchmark interest rates. The European Central Bank (ECB) has also decided to raise its benchmark interest rate next month.
This has a huge impact on countries with poor economic prospects. Because, these countries will be abandoned by investors so that it is difficult to obtain financing and reduce the depreciation of the exchange rate.
The International Monetary Fund (IMF) said that more countries would adopt tighter monetary policies. Therefore, they warned that borrowing costs would rise and economic growth could weaken
The World Bank in its latest report Global Economic Prospects also warns of the same thing. The increase in benchmark interest rates and high inflation will make a number of countries struggle to contain capital outflows.
Bank Mandiri chief economist Andry Asmoro said countries with high inflation rates, large current account deficits, and low economic growth will be abandoned by foreign investors amid the trend of high global interest rates.
Andry mentioned a number of countries including Colombia and Brazil. Countries in the European region are also not free from this threat, such as Hungary, Poland, and Romania.
“All the countries are on the rise bond yieldis relatively high compared to peers because there are many foreign assumptions net sell,” said Andry to CNBC Indonesia, quoted on Saturday (25/6/2022).
As is known, Turkey’s inflation shot up to 73.5% (year on year/yoy) in May this year, or recorded the highest record since October 1998. Turkey has also always recorded a current account deficit since 2012, except in 2019.
Their economic growth weakened to 1.2% (yoy) in the first quarter of 2022 from 1.5% in the previous quarter.
The World Bank even predicts Turkey’s growth will fall from 11% in 2021 to 2.3% this year.
In its report, the World Bank warned that countries with the status of commodity importers would face shocks in short-term and heavy debt outflowespecially in the stock market.
On the other hand, a country with a large number of commodity exports, such as Indonesia, will have a better ability to reduce external shocks.
“Surging inflation, rising interest rates, large debt burdens, and slowing economic growth will put pressure on the financial markets of a number of countries,” the World Bank wrote.
The World Bank says no area is free from risk outflow. According to them, most emerging market and developing countries will experience large capital outflows which will make the fiscal authorities accelerate their fiscal tightening measures.
The tightening of monetary policies in developed countries will also make the Southeast Asia and Pacific region struggle to contain itself outflow. “Countries that rely on short-term foreign capital such as Mongolia and Dailan will be severely affected,” the World Bank wrote.
The soaring public-private debt ratio since 2019 is also a problem for countries such as Fiji, Laos and Mongolia. The large debt makes it difficult for them to meet their financing needs when foreign investors flee.
Fiji’s public and private debt to GDP ratio reaches 80% while Laos and Mongolia, which have a debt ratio of 60% to GDP, will not experience the same. It will reach 60%.
The World Bank also highlighted the ability of Nepal, Pakistan and Sri Lanka to curb capital outflows due to their large debts and poor economic prospects. The country is now struggling with a surge yield debt securities, inflation, and currency depreciation.
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